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When an advisor switches firms, it’s the investor’s choice whether to stay or follow. Nothing should interfere with that

By Neil Gross | December 08, 2014 06:00

Ugly legal fights sometimes break out when investment advisors decamp from one dealer and go to work at another. The advisor typically views his or her clients as a personal "book of business," built up through hard effort, and thus an asset that rightfully should transfer with the advisor. But the dealer being left behind usually sees the matter quite differently. To the firm, customers are clients of the dealer, whose business the advisor was handsomely paid to develop and secure.

Even a moderate exodus can prompt accusations that the advisor and new dealer conspired to illicitly harm the former dealer's business. All sides quickly lawyer up and, within a day or two, they're in court arguing about whether an injunction should be granted to prevent further solicitation of accounts.

Unfortunately, in those courtrooms no one speaks on behalf of the clients. What often gets forgotten, as a result, is the simple premise that clients should have the right to choose who advises them. If they want to stay with the firm — as some do because they like the dealer's size, stability or research capability — then that choice ought to be fully respected. Likewise, if a client prefers to go with the advisor who understands their financial situation and perhaps crafted their investment plan, then they should be able to do so.

Nothing should interfere with this choice. In particular, the client's preference shouldn't be constrained or thwarted by whatever competition restrictions may have been placed in the employment agreement their advisor and his or her former firm signed years earlier — a contract to which the client was never a party.

Those sorts of restrictions make sense for governing competitive relationships that are merely commercial in nature, like the supply of gardening services or sales of industrial machinery; but interactions between an investment advisor and their client often involve hallmarks more emblematic of what should be considered a professional relationship: trust, reliance, vulnerability and obligations to exercise skill and judgment appropriately for the client's benefit.

This difference takes the matter beyond the competing commercial interests of the firm and its former employee. It requires that emphasis be placed on safeguarding client interests when disputes over advisor departures get resolved. Moreover, there's a broad societal imperative to do so given the increasing importance of personal investing not only to individual financial security, but correspondingly also to society's overall financial well-being.

The idea of prioritizing client interests above commercial ones isn't radical or new. Others have raised the issue before. For example, mediator Joel Wiesenfeld penned guest columns on this subject in the December 2007 and November 2008 editions of Investment Executive when he was a securities lawyer. Yet, today, departing advisor disputes still occur and still get fought out in court in the same old way with clients' interests all too often being relegated to a secondary consideration in the outcome.

What can change this is a bit of proactive regulatory involvement. Everyone would benefit from a clear directive that a non-partisan notice must be sent to all clients immediately when an advisor moves to another dealer, informing them of three basic things: the fact that the advisor has switched firms; the advisor's new location and contact information; and the fact that the client has a right to choose between remaining with the old firm or transferring their account to the new one.

Ideally, this non-partisan notice should also urge clients to make an informed choice. It should encourage them to hold discussions with both the advisor and the former firm about why the advisor left. It should provide clients with guidance on key questions they can ask to gain insight into whether the departure reflects issues that should concern them about the advisor's or the former firm's reliability. And the notice should inform clients about resources available for checking the registration status and disciplinary history, if any, of the advisor, the former firm and the new firm.

The wording of such a notice should not be left to either side's discretion. It should be a standardized, mandatory form, in simple and clear language that clients can understand. And — just as importantly — the language should signal back to judges and courts that the normative priority within this community of investment firms and advisors is to safeguard client interests over the commercial interests of both the firm and the advisor.

Advisors Deborah Sullivan and Christine Saitta joined RBC's office in Sewickley, Pa., a suburb of Pittsburgh. The two advisors will report to Kenneth Ross, senior managing director of RBC's Pittsburgh complex.

Sullivan and Saitta generated $1.7 million in annual revenue while at Morgan, according to a statement from RBC.

The firm also said that it has so far this fiscal year recruited 80 advisors managing about $6 billion in assets and generating about $50 million in annual revenue.

Senior team member Sullivan has almost three decades of experience in the industry. She had been at Morgan for seven years, according to FINRA records. Prior to that she worked at Hefren-Tillotson from 1985 to 2007.

Saitta has been in the industry since 1996. She joined Hefren-Tillotson in 2002, and joined Morgan in 2007.

As the glut of baby-boomer advisors continues to get older, succession programs are becoming more and more importantBy Aaron Broverman | September 2014

Succession planning is becoming ever more important among financial advisors - especially as many are beginning to contemplate retirement. But most of the advisors surveyed for this year's Report Card series said the succession programs their firms offer either aren't very helpful or aren't communicated effectively.

"Having a good succession program is important due to the age of today's brokers," says an advisor on the Prairies with Toronto-based BMO Nesbitt Burns Inc. "They're like western Canadian farmers, for whom the average age is mid-50s or 60s."Even though the average age of the 1,683 advisors surveyed for this year's Report Card series is not quite that high, it is increasing. Today, that average age is 48.9 years, whereas it was 46.7 years in 2009. In tandem with this overall rise in average age is an even greater increase in the overall average importance rating advisors gave to the "firm's succession program for advisors" category, which was 8.7 this year vs 7.5 in 2009.

Although advisors who were surveyed said that succession planning is becoming more and more critical, they also pointed out that their firms' efforts in this category are sorely lacking. There were various reasons for this, but the advisors most dissatisfied with their firm pointed to several concerns regarding the succession program, such as: there's no autonomy regarding whom they can sell their book to and there's inconsistent support with the transition and valuation of a book of business.

"There's no consistent valuation model for the transition of a book of business that the firm is willing to put on paper," says an advisor in British Columbia with Toronto-based TD Wealth Private Investment Advice, which received the lowest rating (6.0) for the category among the brokerages. "There's way too much subjectivity to it. The price of your book can turn into a beauty contest."

"Often, they just want to help who they want to help," adds a colleague in Ontario. "I had a verbal agreement with a broker who was retiring to buy his book. It was rubber-stamped, ready to go - and the manager and the firm stopped it. They forced him to sell his book to someone he didn't want to."

Other advisors who gave their firms low ratings in this category reported a lack of communication regarding how their firm's succession programs works. For example, several advisors with Lévis, Que.-based Desjardins Financial Security Independent Network, which received a rating of 7.0 in the category - tied with Markham, Ont.-based Worldsource Wealth Management Inc. for the lowest rating in the category among the dealer firms - felt they were left to their own devices.

"I've sent emails saying I want to talk about [succession planning]," says a Desjardins advisor on the Prairies, "and they didn't respond to any of them."

In fact, several colleagues added they were unsure if Desjardins even has a succession program and, as a result, they were preparing their succession plans on their own.

But it appears that there's a disconnection between Desjardins advisors and their firm, which offers a full succession program with significant assistance, according to Shawn Smith, Desjardins' vice president, sales and distribution, individual network, in Toronto: "We have planning, financial and accounting [support]. [We work] with the individual advisors and the managing director of the financial centres they're with to figure out the right kind of support [advisors need]. We will even identify candidates to take over their books of business."

The firms that had the highest performance ratings in the category were praised by their advisors for communicating regularly and offering advisors support whenever they needed it - while still leaving the ultimate fate of the books up to the advisors. These firms also put significant focus on building up the next generation of advisors who will take over these businesses.

"[The firm] supports your goals and doesn't dictate what to do with your book," says an advisor in B.C. with Calgary-based Leede Financial Markets Inc., which received the highest performance rating for succession programs (9.7) in this year's Report Card series.

Leede also ensures that younger advisors will be well prepared to inherit the books of its older advisors through its mentoring program, through which senior advisors meet one-on-one with younger advisors on an ongoing basis."I was out for a long lunch with one of our 20-something advisors," says Robert Harrison, Leede's president and CEO, of an example of the mentoring program in practice. "I suggested a few things that happened to me, and what was successful for me and what wasn't. It's an ongoing mentorship."

Waterloo, Ont.-based Sun Life Financial (Canada) Inc., which was rated 9.2 in the category, takes a different approach by removing the stress of having advisors find successors altogether. The firm guarantees it will buy its advisors' books - and transfer each to a suitable successor.

"Within our system, Sun Life is the guaranteed buyer; we're actually the middle person, as we facilitate that process," says Vicken Kazazian, senior vice president of Sun Life's career sales force. "So, we're very much involved if an advisor is planning on leaving the business. We facilitate the process whereby another advisor actually buys that book from the [retiring advisor]."

Says a Sun Life advisor in Atlantic Canada who just inherited a retiring veteran's book: "I took over senior advisor's book, and [the process] was smooth. There is a guy dedicated to that, and it happened over a three-year period."

Here is but one industry example to indicate how investment advisor (salespeople, not portfolio managers) "books of business" are valued. You might find many others in your travels, I know I have.

Advisor Succession Planning Guide

Introduction

Many financial advisors are looking to grow their businesses by buying a practice while others are looking at selling their practice and/or developing a succession plan.

Since it is Investment Planning Counsel’s goal to help our advisors to build a better business, we have prepared this guide to assist both buyers and sellers. This guide will be covering some of the key issues under consideration as follows:

• Is Buying a Practice Right for Me?• Is Selling my Practice Right for Me?• Valuation Methods• Factors that may increase/decrease the price• The documentation, the terms of an agreement • Financing• Transition Plan• Formula for Success

Is Buying a Practice Right for Me?

Buying a financial advisory practice can double your assets overnight. It can also double your workload but it may not double your revenue or profitability.

In purchasing a practice the buyer commits to:1. a financial investment2. a professional investment to service the new clients3. a personal investment to build one on one relationships with the new clientsIn consideration of a purchase transaction, a buyer should consider what of the following main drivers are important:• IncreaseAUA• Increase revenue• Increase profitability• Take the business to the next level• Jump start the business• Utilize excess capacity in my existing practice • Grow faster than you can organically

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Edward Jones And Former Stockbroker Battle Over Customer SolicitationWritten: July 7, 2014

For some industry veterans, leaving a brokerage firm is often easier said than done. At times, the attempt to say bye-bye seems the living embodiment of the warning that you can run but you can't hide. No sooner are you out the door and set to service your accounts, then, whammo, your former employer beats a hasty retreat to a courthouse and slaps you and your new firm with a restraining order. Then, while you are reeling from that stunning development, you open your mail and find a FINRA Arbitration Statement of Claim.If the former employer moves quickly enough and the courts and FINRA are of like mind, you may find yourself handcuffed and unable to realize a penny from your book of business -- until such time as you cry "Uncle" and settle; or until such time as the FINRA arbitration has gone to verdict and a final award issued.

Case In Point

In a Financial Industry Regulatory Authority (“FINRA”) Arbitration Statement of Claim filed in March 2014, Claimant Edward D. Jones & Co., L.P. asserted causes of action including unfair competition and breaches of contract and fiduciary duty. The claims arose in connection with Respondent Lugar’s alleged improper retention and use of the firm’s information and materials while purportedly soliciting the firm’s customer after his resignation. In the Matter of the FINRA Arbitration Between Edward D. Jones & Co., L.P., Claimant, vs. Danny W. Lugar, Respondent (FINRA Arbitration 14-00957, June 25, 2014).

After starting employment in January 2010 with Claimant Edward Jones, Respondent Lugar allegedly executed an Investment Representative Employment Agreement. After maintaining that relationship for several years, Lugar voluntarily resigned on January 24, 2014.

Claimant Edward Jones filed actions against Lugar alleging breaches of the Employment Agreement and other claims against in:

the Circuit Court for the County of Roanoke, Virginia, andin a FINRA Arbitration proceeding.

On March 24, 2014, Edward Jones obtained a Temporary Restraining Order ("TRO") from the state court, which automatically dissolved in thirty days absent subsequent modification. In addition to seeking unspecified actual and/or punitive damages, costs, and fees, Edward Jones sought an order of permanent injunction immediately restraining and enjoining Lugar, indirectly or directly, alone or in concert with others (including any officer, agent, employee and/or representative of his new employer) from:(a) contacting or attempting to contact, soliciting or attempting to solicit business from any client or customer whom Respondent served during his employment with Claimant, or any other customer or client of Claimant whose name became known to Respondent while in the employ of Claimant for a period of one (1) year;

(b) using, disclosing or transmitting for any purpose (including but not limited to solicitation of said clients), any information contained in the records of Claimant, including but not limited to the names, addresses, and financial information of said clients; and

(c) requiring Respondent to return to Claimant as promptly as possible all originals, copies or other reproductions, in any form whatsoever (including electronic), of any record of Claimant, and to purge or destroy any computerized record of Claimant that is within Respondent’s possession, custody or control.

Respondent Lugar denied the allegations in the court and FINRA proceedings, and raised the affirmative defenses that he had been defamed by Claimant Edward Jones and the victim of his former employer’s unfair competition.

The Ol' Curveball

Waging war on two fronts, Edward Jones had Lugar in a state court and a FINRA arbitration, and the former employer sought to implement Non-Solicitation and Non-Contact prohibitions. As the drama unfolds, we are at that point where the FINRA Arbitration Panel is considering whether the court’s TRO should be continued as an ongoing injunction through the arbitration or until the arbitrators render a decision. Given how this dispute starts out, you get the sense that you better buckle your seatbelt because it looks like we’re in for a bumpy ride.

Lo and behold, in April 2014 the arbitration settled!

Will miracles never cease?

The Understanding

Pursuant to a Stipulated Settlement between the parties, the FINRA Arbitration Panel ordered the following:

1. From the date the Stipulated Award is entered through March 23, 2015, Respondent will refrain from soliciting any existing clients of Claimant whom Respondent serviced while employed by Claimant for the purpose of requesting that a client of Claimant transfer his/her account from Claimant to Respondent or Respondent's new employer. This restraint shall not apply to any relatives of Respondent, including relatives by marriage, extending to grandparents, parents, siblings, aunts, uncles, first cousins, nephews, nieces and grandchildren. The term "soliciting" shall mean to initiate communications with a client of Claimant for the purpose of inviting, encouraging or requesting a client of Claimant to transfer his or her account from Claimant to Respondent or Respondent's new employer.

2. The term "soliciting" shall not include any of the following:

(i) communications directed to the general public, such as newspaper advertisements or signs, listings or postings on websites or social media sites, such as Facebook or Linkedln, which list Respondent, his current position and contact information with Respondent's new employer and his past experience as a financial advisor, so long as Claimant is not mentioned by name;

(ii) publications, such as pamphlets, brochures, or other materials (which list Respondent, his position and contact information with Respondent's new employer, and his past experience as a financial advisor, so long as Claimant is not mentioned by name) that are displayed in the branch of any bank or other companies affiliated with Respondent's new employer, or

(iii) contacts or communications in response to an inquiry or request from a client of Claimant about services provided by Respondent or Respondent's new employer and/or moving his/her account to Respondent or Respondent's new employer.

3. Nothing in this Stipulated Award shall apply to clients of Claimant who have already moved their accounts from Claimant to Respondent's new employer. Further, In the case of any client of Claimant who transfers his/her account to Respondent's new employer after the date of this Stipulated Award, nothing in this Stipulated Award will apply to such client after the date of the transfer of the account(s).

4. Nothing in this Stipulated Award shall prohibit Respondent and/or Respondent's new employer from receiving, accepting and/or processing any requests, including account transfer requests, from clients of Claimant who make such requests after the date of this Stipulated Award. Further, Claimant shall not interfere with a client's request to transfer his/her account to Respondent or Respondent's new employer where the account is not subject to any lien for monies owed by the client or other bona fide claim. . .

Bill Singer's Comment

The parties to this dispute crafted a Stipulated Award, and I urge all industry participants to carefully read the provisions. Paragraph 1 of the Stipulated Award shows how a Non-Solicitation provision can be crafted in terms of temporal considerations (dates during which the provision is in force) as well as the scope of the restriction. Here, the time frame runs from the date of entry of the Award and through the date certain of March 23, 2015, after which the prohibition vanishes. More notably, is the scope of the Non-Solicitation, which covers "any existing clients," which is far less extensive than including "names" that became known to a registered person or individuals on specified lists. Moreover, the registered person is limited not to merely "any" existing clients but to those serviced while employed by Claimant -- yet a further refinement and narrowing. A further refinement exempts those we terms "F&F," or friends and family.

In deeming what is and isn't solicitation, note that the initial emphasis in Paragraph 1 of the Stipulated Award is on initiating communications -- which would permit communications with clients who initiate communications with the registered person but not vice versa. The covered registered person could presumably initiate communications with a covered client provided that the purpose of said communication is not intended to foster the transfer of that client's account to the registered person's new firm.

I urge you to carefully consider the more expansive definition of "soliciting' as set forth in Paragraph 2 of the Stipulated Award. Note that it does not deem a public advertisement or online posting as constituting solicitation provided the content reflects what is commonly characterized as a "tombstone;" namely, name, title, and contact information but not disclosing the name of the former employer.

There's also a so-called "Jailhouse Break" provision, which acknowledges that those clients who already transferred from the old to the new employer's brokerage firm (but who might have been covered under a Stipulated Award) are exempt. Why the term "Jailhouse Break?" A cynic might explain that this type of provision encourages departing registered folks to try and sign as many clients from the former firm as quickly as possible under the theory that once they break out of the former firm, they will likely be exempted under this type of settlement provision.

This should be precedent setting. Departing brokers, ethical brokers, and those who are punished by their firms for doing the right thing, need to know that the firm can be held accountable for acting like commission salespeople while posing as trusted "advisors". Also brings up the topic of whose clients are they anyway when brokers depart. see viewtopic.php?f=1&t=69

Wall Street Litigation Opens Window on Product Sales Conflicts

Posted by Duane Thompson on June 13, 2014 in Great Sources of Information

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>>>The attempted defection by most of Deutsche Bank Securities’ private client group to an advisory firm last month offers a new twist to the old-fashioned tale of broker-poaching on Wall Street.

In what may be a sign of the times, Wall Street executives are now encountering a new fiduciary culture emerging within its ranks, not merely brokers jumping ship for greener pastures.

According to court documents in two lawsuits filed with the New York Supreme Court in Manhattan last month, Deutsche Bank Trust Company Americas v. HPM Partners and Pace v. Deutsche Bank Securities Inc., two of the resigning Deutsche brokers alleged that pressure by management to sell high-margin proprietary products made it impossible to fulfill their fiduciary obligations.

One of the brokers, Benjamin A. Pace III, is a frequent commentator on CNBC and was the bank’s chief investment officer for wealth management in the Americas. The other plaintiff in the counter-suit, Lawrence B. Weissman, was head of portfolio consulting and reported to Pace.

Deutsche Bank, in turn, rejected the conflict-of-interest charges.

“Deutsche Asset and Wealth Management’s first priority is to fulfill fiduciary duties owed to clients and we reject the claims made in this complaint,” Renee Calabro, a spokesperson for the bank, told Bloomberg.com in response to the counter-suit. ]

In its original suit seeking a temporary restraining order to prevent a wholesale exit of the private client group, and a potential loss of billions in assets, Deutsche Bank claimed the resignations were a breach of fiduciary duty to Deutsche Bank, including violation of its employment policies. Company policy requires up to 90 days’ notice prior to resignation and a ban on soliciting former customers for another 120 days.

Whether this dispute turns out to be just another ugly spat over broker poaching remains to be seen.

There was certainly bad blood between them. According to the brief, two years ago HPM was successful in hiring away four advisors in DB’s California office, resulting in the loss of $550 million in assets under management to HPM and forcing it to close its West Coast office.

“This time HPM’s raid knows no limits,” Deutsche Bank’s brief stated, “and seeks to choreograph a mass exodus of key talent…resulting in a vast windfall for HPM – while HPM easily avoids the many years of marketing and investment dollars that it takes to establish and maintain those client relationships.”

In an effort to avoid DB’s policy restrictions on departing brokers, Pace and Weissman presented a novel legal argument that would not have been available to brokers simply moving to another wirehouse. As financial advisors in the private banking group, meaning they were also affiliated with Deutsche Bank’s registered investment advisory firm, Pace and Weissman argued that the personnel policy was unenforceable because the bank’s efforts to establish a sales quota system would have “breached the Group’s...fiduciary obligations to put the customers’ needs first.”

According to court filings, they repeatedly expressed concerns with management regarding the conflict between an open-architecture platform and pressure to sell proprietary products. In one incident, according to the counter-suit, management allegedly wanted them to place a newly developed hedge fund in customer accounts, which Pace and Weissman argued was inappropriate and unwanted by many of their retired investors, some of whom were in their 80s. Senior executives also repeatedly requested data on their other customer portfolio allocations to hedge funds in order to create investing targets for the private client group.

To avoid any negative perceptions by reluctant customers, Pace allegedly was urged by senior executives to create a new asset class called “long/short equity” as a way of obscuring the hedge fund investment. According to court filings, he declined.

At other times, according to court documents, senior management asked Pace and Weissman to swap out existing outside funds in which the private client group invested with new proprietary products. One proprietary fund allegedly pushed by management was a European fund that invested only in European Union countries and not Great Britain or Scandinavian countries; whereas the Group’s investment models required broader coverage. Similarly, senior management wanted Pace to replace an outside Japanese equity fund with its own proprietary holding, which the counter-suit alleged would generate adverse tax consequences for its customers.

At one point, senior management allegedly considered ways to avoid fiduciary conflicts by transferring some of the private client group to the bank’s broker-dealer, according to court documents.

In addition to arguing points of contract and employment law by both sides, the counter-suit did undertake a brief analysis of the advisors’ fiduciary duty, claiming the law was well settled in that area. Financial advisors such as themselves [meaning Pace and Weissman acting as investment advisors] “owe the highest duty of loyalty to those on whose behalf they act,” according to their brief. The Pace brief also noted their responsibilities under FINRA Rule 2111 to “only recommend products that were suitable for [their] client,” as well as citing other cases requiring brokers to give “honest and complete information” to their customers; and when a fiduciary duty is lacking “use reasonable efforts to give information relevant to the affairs that [have] been entrusted to them.”

On May 30th, Justice Marcy Freidman ordered a June 24 hearing for all parties to show cause why a temporary restraining order should or should not be entered prior to entering arbitration.

Regrettably, it’s unlikely we’ll ever learn all of the facts in the case. Ironically, FINRA’s Conflicts of Interest Report, [See attached ‘FINRA conflicts report] released last fall, highlighted many of the same problems raised in the Deutsche case.

In the report, which strongly encouraged broker-dealers to identify and mitigate firm-wide conflicts of interest, FINRA recommended that “firms’ private wealth businesses should operate with appropriate independence from other business lines within a firm.” The report went on to say FINRA was “encouraged by the general adoption of open product architectures (i.e., the sale of third party in addition to proprietary products).”

FINRA also recommended firms develop safeguards such as the use of product review committees to reduce “pressure to prefer proprietary products to the detriment of customers’ interests.” This issue was particularly important, the report emphasized, when firms seek to leverage their brokerage platforms to cross-sell other products and services. One of the allegations in the Deutsche suit was that the bank skirted its usual due diligence process for new product development.

In a statement accompanying the FINRA report, FINRA Chairman and Chief Executive Officer Richard Ketchum said that while member firms “had made progress in improving the way they manage conflicts, our review reveals that firms should do more.”

Following the June 24th hearing, it’s likely that FINRA arbitration is the next stop in the Deutsche dispute. Whether the Court grants restraining orders or not, there is always the possibility that FINRA, the SEC or New York Attorney General could intervene by opening separate investigations. Given the significant media attention, probably due to the fact that Pace was with Deutsche Bank for 20 years and a frequent television commentator, it seems unlikely that the case would escape regulatory attention.

Separately, after the arbitration case is concluded, that is, if it is not settled in private between the parties, the arbitrators could also make an enforcement referral to FINRA if they believe there were significant violations. Even if the arbitrators reach a decision, the panel is not required to write a basis for its decision, unlike a court.

Assessing where Deutsche Bank is on the fiduciary spectrum, and HPM Partners, for that matter, is of course, problematic. Given the discretionary management of assets and special compensation charged for advice, the private client group operated under Deutsche Bank’s RIA. However, according to Deutsche Bank’s Form ADV, of its 4,100 employees, 3,600 are registered representatives and only 276, or roughly 7 percent, are investment adviser representatives. In contrast, 16 of HPM Partners’ 55 employees, or 29 percent, are IARs. Moreover, three of HPM’s 20 partners are Accredited Investment Fiduciary® designees, suggesting a strong professional interest within the firm in best practices. HPM reported no disciplinary infractions under its advisor registration, nor did Pace and Weissman have a disciplinary history as brokers or IARs.

How this limited data set translates into a vibrant, client-first fiduciary culture is difficult to judge. Certainly, IAR or AIF® numbers alone are not necessarily an accurate barometer of a firm’s fiduciary culture, and the disciplinary histories of small advisory firms are typically clean (or much cleaner) than a large brokerage firm with thousands of workers. However, the sheer weight of multiple conflicts that Deutsche Bank and other large firms must avoid or manage on a daily basis suggests hard choices will have to be made as Wall Street moves forward along the fiduciary path.

A top Vancouver advisor has won a decisive victory against her former employer By Geoff Kirbyson | March 07, 2014 17:05

A former investment advisor at CIBC in Vancouver is hoping to get back into the advisory business after a British Columbia Supreme Court found she was fired without cause three years ago.In a decision handed down last week, Justice Randall Wong also found the bank liable for breach of contract with Guiyun (Han) Ogden and ordered costs and damages to be determined at a later trial.Ogden's lawyer, Heather Cane, said the result was "incredibly good" and opens the doors for Ogden to return to work as an investment advisor with another firm. "She loved her job. It was like a baby to her. She treated all of her clients well and delivered exceptional service," Cane says.

Compounding the situation in 2011, Ogden was seven months pregnant when she was terminated, Cane says.Wong gave little weight to two disciplinary letters Ogden had received from her supervisors in the months prior to her dismissal. "[The managers] forged ahead with a termination for cause based on inaccurate and incomplete information despite knowing they had a heightened responsibility to get it right," Wong wrote in the judgment.Ogden was deeply distressed about the letters and considered taking them up the chain of command when she received them but ultimately didn't. She did, however, talk about leaving the bank because she was so upset.Wong noted that two of Ogden's managers, Paula Vanni and Rod Fossen, fired her before she could quit and take her large book of business to a competitor.The incident that triggered the actual firing involved a panicked client in China who needed to transfer large sums quickly, in order to preserve a real estate deal in Canada. Ogden agreed to use two of her personal accounts to facilitate the transfer.But the rules about this type of action were unclear, the judgment says. "This was not a case of ‘don't do x' and Ms. Ogden did x'. The rule she is alleged to have breached was far from clear, was open to interpretation, and was sometimes confusing in its application. This was also a transaction in which there was no actual conflict of interest, but only a potential conflict of interest." The judgment also says that, under a unique set of circumstances, Ogden failed to perceive a potential conflict of interest, and that she acted with "the best of intentions."Ogden has been unable to work as a financial advisor because CIBC had filed papers with the Investment Industry Regulatory Organization of Canada (IIROC) setting out why she was fired with cause.The regulatory oversight required for Ogden because of the IIROC filing would have made it prohibitively expensive for any firm to hire her, Cane says.The judge ordered that a correction be made with IIROC, nullifying the filing and its content. Cane says she is awaiting confirmation from CIBC that this has been completed, at which point she'll notify Ogden that she has the green light to hand out her resume.Ogden hasn't been unemployed since her termination. Most recently, she has been working as a mortgage broker at a small firm in Vancouver.At least one potential employer has already been in contact with Cane about discussing employment possibilities with Ogden. "I'm sure people are interested in her because she's such a great financial advisor," Cane says.Next: Bank could appeal

Firms are shelling out a pretty penny to get top financial advisorsBy Clare O'Hara | November 2013Using big bucks to attract top-notch talent isn't a new phenomenon in the financial services industry. But what was once modest monetary assistance to help a financial advisor move his or her book to the new firm has now spiked to unreasonable levels, says Andrew Marsh, president and CEO of Toronto-based Richardson GMP Ltd."Through the course of the past decade," says Marsh, "the dollar amounts - especially with the offers coming out of the banks - continue to get more aggressive year-over-year."When Marsh first started recruiting advisors for GMP Private Client LP (prior to its merger with Richardson Partners Financial Ltd.) in 2004, standard bonus amounts offered to advisors for switching firms were 70%-75% of revenue generated in the previous 12 months by the advisor.

Now, those levels have skyrocketed to 150%-200% of revenue generated. And with consolidation in the industry continuing to rise, doors of opportunity are opening more often for competitors to target the top-producing advisors on the Street.For an advisor producing $1 million in revenue, some firms are offering incentive bonuses up to $2 million."Over the years, bonus levels spike up and down," says Brian Curry, president of Burlington, Ont.-based Curry-Henry Group Inc., which specializes in advisor placement and recruiting. "But, right now, there are some serious dollars out there for the right type of advisor."And competitors are more than willing to shell out a pretty penny to get the books of business that they want.Marsh knows first-hand how these offers can affect a firm. Richardson GMP is in the process of acquiring Macquarie Private Wealth Inc., the Canadian wealth-management arm of Australia-based Macquarie Group Ltd."The banks are really aggressively throwing offers out there to entice the Macquarie advisors away from Richardson GMP," says Marsh. "Over the past 30 days, the cheques have gotten much more aggressive. And there are a lot of advisors left scratching their heads in disbelief on how much cash is being thrown their way."Toronto-based CIBC Wood Gundy has already snagged two Macquarie advisors from Markham, Ont.; Raymond James Ltd., also based in Toronto, is in discussions with several other Macquarie advisors."An acquisition in the industry is certainly an opportunity for us," says Peter Kahnert, senior vice president, corporate communications and marketing for Raymond James. "While there will always be people who will move for the money, there are plenty of others who are looking beyond the dollar."Kahnert would not confirm the level of recruitment bonuses Raymond James uses to entice new talent, but says it is competitive within the industry.But can the independents remain competitive with the larger bank offers? Marsh says these offers often don't make sense economically, even for the larger firms. For an advisor producing $1 million annually (with a 50% payout), the recruiting firm is bringing in $500,000. After the costs of running the firm, Marsh says, a firm would average a profit margin of 10%-20% a year."So, after writing $2-million cheques, these firms aren't making money on these advisors for at least eight to 10 years," Marsh explains. "How much are the banks willing to spend in recruiting advisors [when the] result in back-and-forth movement is a zero-sum game? Do these costs of recruiting - with no real gain - really help clients?"George Hartman, managing partner with Accretive Advisor Inc. in Toronto, refers to this strategy as "chequebook recruiting" and cautions advisors to look at every aspect before jumping at the dollar signs: the cheque doesn't come without strings attached.Many of these signing bonuses are paid out in the form of a forgivable loan. If the advisor fulfils a certain set of mandates, repayment of the loan is waived. In order for the firm to protect its assets, it can demand that the advisor either remain with the firm for a certain period of time or hit specific revenue targets over the first couple of years.Historically, the time frame for being locked in was five years, Marsh says, but those timelines have been extended to eight to 10 years so that firms can spread the financial hit to their balance sheet over a longer period of time."It's the only way," says Marsh, "these firms can make these aggressively priced deals make any sense financially on paper."And this is the part of the contract about which Hartman cautions advisors: "They're going to have a financial obligation to a firm that could potentially be 10 years. So, [advisors] have to ask [themselves] if they are OK with that. Can they live under that obligation?"Some Macquarie advisors may be second-guessing their decision to sign long-term contracts. Macquarie was known on the Street for publicly announcing every large book of business it nabbed from competitors, including Richardson GMP, which now owns the remainder of those recruiting contracts."It's a tough play for those advisors," says Curry, "because they latched onto a firm they thought would be a strong force in the Canadian marketplace, and it didn't work out that way for them."Any advisor who wants to leave his or her firm before his or her contract is up is required to repay the outstanding loan amount.The issue of recruiting bonuses hasn't stirred some feathers in just the Canadian financial services industry. In October, the Financial Industry Regulator Authority (FINRA) in the U.S. proposed a rule that would reveal an advisor's bonus to clients. If approved by regulators, advisors will be required to disclose their incentive bonus to any client who follows the advisor to the new firm within one year of the transition.The amount to be declared would include any form of compensation, including signing bonuses, upfront or back-end bonuses, loans, accelerated payouts and transition assistance of US$100,000 or more, as well as to future payment that is contingent on performance criteria. (Currently, the proposal does not include retention bonuses.)The Investment Industry Regulatory Organization of Canada (IIROC) is not looking at anything specific regarding the disclosure of advisors bonuses, but the Canadian regulator is monitoring FINRA's proposal closely."We will follow up with our FINRA colleagues," says Lucy Becker, vice president, public affairs, with IIROC, "to learn more about [this initiative] and to gain a better understanding of the issue and FINRA's objectives."Marsh favours the implementation of a similar proposal in Canada; he says the industry needs to start putting the clients' interests first."We are entering an era of fiduciary responsibility - an era of managing conflicts, full disclosure and transparency," Marsh says. "I think it's only fair for clients to have full disclosure about what their advisors are being paid in cash to switch firms."

BloombergMorgan Stanley Wealth Management, the nation's largest brokerage by adviser head count, lost $8.4 billion in client assets during the third quarter, as some of its major producers took their business to competing firms.

In the three-month period ended Sept. 30, the average assets under management of advisers who moved also jumped nearly 25% from the previous year, to $402.2 million, according to preliminary data from InvestmentNews' Advisers on the Move database.

The breakdown of Morgan Stanley's reported 3Q adviser exits.

The IN database on adviser movement is not exhaustive, as firms only report a portion of the advisers they recruit and none disclose advisers who leave. Generally speaking, the moves of advisers with small books of businesses are not tracked by the data, and advisers do not necessarily take all of their business to the new firm.

But the data indicate continued recruiting challenges for Morgan Stanley, which completed its acquisition of Citigroup Inc.'s Smith Barney unit earlier this year. Morgan's wealth management division lost a net 11 adviser teams in the third quarter, the most of any firm tracked by IN.

Four of the 10 largest departures from Morgan Stanley in the third quarter were to other wirehouses. Three teams managing $7.9 billion in assets moved to UBS Financial Services Inc., while a $1 billion team in the New York area switched to Wells Fargo Advisors LLC.

Morgan Stanley had 16,321 advisers and $1.8 trillion in assets at the end of the second quarter, according to the company's regulatory filings, making it the largest wirehouse by advisers and the second largest by assets.

“In my case, it was a personal choice,” said Elaina S. Spilove, who oversaw $2.5 billion in assets at Morgan before moving to UBS. “I'd rather be one of 7,000 than one of 17,000; much more hands-on management.”

Christine Jockle, a spokeswoman for Morgan Stanley Wealth Management, said the firm's attrition is at a near-historic lows and average revenue at an all-time high. She said the IN data does not include the number of advisers who joined the firm who did not want to disclose their data publicly. She declined to elaborate on how the firm calculates attrition or to provide an overall number of unreported assets that have come into the firm.

Morgan did add some major advisers last quarter. Robert Finan and Anthony LaFonte, who managed $400 million, left Bank of America Merrill Lynch to join the firm in Red Bank, N.J., and Scott Siegel moved his New York City-based SKOC team, which managed $1.5 billion, from J.P. Morgan Securities LLC.

“They are a firm under siege,” said Danny Sarch, an industry recruiter who has been critical of Morgan Stanley. “The smaller, non-wirehouses have preyed on them very successfully.”

Danny Sarch asks where is the next generation of adviser going to come from?

Robert Alpert moved his namesake firm, which includes three other advisers, to a Woodbury, N.Y., branch of Wells Fargo Advisors last week after being affiliated with Morgan Stanley since its 2009 merger with his previous firm, Smith Barney.

He said Morgan's increased fees were a burden for his smaller and intermediate-sized clients.

In a statement, Ms. Jockle said Morgan Stanley's former advisers, “who always forget to mention the big checks they took to leave,” will put their spin on events.

Morgan Stanley on Oct. 18 will announce its third-quarter earnings, which will give a broader picture of their overall recruitment levels.

Bank of America Merrill Lynch, the nation's largest wirehouse by assets, gained seven large teams last quarter, but the size of the four teams who left the firm in the same quarter caused a net loss of some $555 million in client assets, according to the data.

In one major deal, the $500 million Guth-Fordyce team in New Haven, Conn., left Merrill for Snowden Capital Advisors LLC, a firm launched last year by two former Merrill executives.

Wells Fargo, the third largest brokerage, netted three advisers and $1.5 billion in new assets.

UBS, the smallest of the four wirehouses by assets and advisers, gained $6.8 billion in assets despite adviser head counts remaining stable. Those gains were driven by attracting three big teams from Morgan Stanley: Mr. Rasweiler; Ms. Spilove, in Princeton, N.J., who focuses on institutional clients; and the husband-and-wife duo of Bruce and Bernadette Lanser, who managed $600 million in Milwaukee. The total between those three teams is $7.9 billion.

The strong asset totals are based on a strategic choice by UBS to focus its recruitment efforts on wealthier advisers, an executive from the brokerage said.

“One of the criteria that we look at is that the [financial adviser] has a significant portion of their book in high-net-worth and ultrahigh-net-worth clients,” said Paul Santucci, head of national sales for UBS. “We focus on the best [financial advisers] in their respective marketplaces.”

UBS is the fourth-largest wirehouse by assets and advisers, competing for top advisers with its larger foes, the dominant triumvirate of Morgan Stanley Wealth Management, Bank of America Merrill Lynch and Wells Fargo Advisors.

Many of the larger wirehouses have lost advisers to the independent circuit, but Mr. Santucci said that that trend has not been the case at UBS. He said most of the advisers his firm loses are still to its “historical competition.”

Overall adviser assets moving between firms dropped 8.9% to $20.9 billion, from revised figures in the same period a year ago.

Morgan Stanley will test that question in arbitration with the Financial Industry Regulatory Authority Inc., now that an Idaho federal court judge has denied most of its requests for a restraining order against three former brokers.

On May 17, the company filed a complaint against three former Smith Barney brokers in its Coeur D'Alene, Idaho. branch who left to join Stifel Nicolaus & Co.

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Donald Scharenberg, Guy Gerber and Michael Armon, the producing branch manager for the office, signed on with Stifel on May 9. In its filing with the court, Morgan Stanley said the three men managed a total of $229 million in assets and produced $1.7 million in revenue between them, which represented more than half the assets managed and revenue generated by the Coeur D'Alene office.

“The Coeur d'Alene MSSB branch is relatively small, with only six financial advisors at the time defendants were still employed there. The departure of three financial advisors, including the branch manager (defendant Armon) has led the relatively small office to experience upset, anxiety, insecurity, uneasiness and concern,” Morgan Stanley said in its filing.

According to the PACER electronic disclosure system, on May 20, the U.S. District Court for the District of Idaho granted the restraining order requests only in regard to Mr. Armon.

“The firm will be pursuing a claim through Finra.” said Morgan Stanley spokeswoman Christine Jockle. She declined to comment further.

“This is just three guys who want to change jobs,” said Steven Andersen, a Boise-based lawyer representing the three brokers. “I don't know why Morgan Stanley brought this to court.”

Morgan Stanley's request for a restraining order against the three brokers asked the court to demand they return “documents, records and information removed from MSSB or concerning MSSB's clients,” to prohibit the destruction of any such evidence that might be used in further proceedings against the three, and to prohibit them from soliciting any other Morgan Stanley employees.

Mr. Andersen said his clients had no documents or information to return to Morgan Stanley, and that Mr. Armon did not violate his employment contract.

In its complaint, Morgan Stanley accused Mr. Armon of violating the Protocol for Broker Recruiting as well as his employment contract, which prohibited him from soliciting other Morgan Stanley employees to join another firm for 18 months after leaving the company. The complaint alleged that Mr. Armon had already tried to solicit two other advisers in the Coeur D'Alene office and another in Washington state to join him at Stifel.

Thank you for your inquiry to the Ontario Securities Commission (OSC) concerning an Investment Advisor selling a client's accounts to another Investment Advisor. I am responding on behalf of my colleague, Jeffrey Fennell.

For purposes of clarification, I believe your inquiry refers to an individual registered as a Dealing Representative selling its book of accounts to another Dealing Representative within the same registered firm. In this case, the firm you are referring to is TD Waterhouse Inc., which is registered as an Investment Dealer. As you are probably aware, Investment Dealers become members of the Investment Industry Regulatory Organization of Canada (IIROC) and the OSC has given jurisdiction to IIROC with respect to regulation of its members. Individuals who are registered as Dealing Representatives of Investment Dealer firms may also be designated Registered Representatives (RR) by IIROC.

I have made an inquiry on your behalf to IIROC and have obtained the following information:

The practice of an RR selling a book of client accounts has gone on for decades and does commonly occur. My understanding is that what generally happens is that a RR that is either retiring or otherwise getting out of the business (the “departing RR”) will “sell” his client list to another RR at the same dealer (the “acquiring RR”). The affected clients are free to either:

continue their account relationship with the acquiring RR; ortake their business elsewhere.

Specifically, the acquiring RR cannot take over the account relationship without the approval of the client. In order to pay for the client list, it is also my understanding that it is common for the acquiring RR to pay the departing RR a portion of the account commissions for accounts of clients that continue their account relationship with the acquiring RR for a certain period of time after the date of client list purchase. It is not my understanding that the acquiring RR pays for the client list up front, since the acquiring RR is only compensating the departing RR for clients that are retained by the acquiring RR.

To answer your question, there are no specific IIROC rules (and no specific Canadian Securities Administrators (CSA) rules as far as I’m aware) that prohibit this practice. The general conflict of interest management requirements set out in NI 31-103 and IIROC Dealer Member Rule 42 do however apply and we would expect that, at a minimum, this arrangement would be disclosed to the client (generally this would be done by the departing RR) before the client would be asked to consent to move their account to the acquiring RR.

The information in this e-mail should be taken as a guide. The content is not intended to provide investment, financial accounting, legal, tax or other professional advice and should not be relied upon or regarded as a substitute for such advice. We recommend that you seek advice from a qualified professional adviser before acting on the information or content appearing in this e-mail or any information or content on a web site to which a link has been provided.

Attention: Mr Jeff Fennell,

Further to my comments to you this morning re the subject matter. Attached is our submission that we previously sent to OSC . In spite of reading a few hundred of pages of comments from investor advocates and soured investors regarding the oppression of Trailer Fess (Commissions), I have not seen any reference to the fact that Trailer Fees automatically become unearned fixed assets for the selling Investment Advisor.

The bottom of page 2 and page 3 is where we make the point that Trailer Fees (Commissions) built into mutual funds actually become unearned fixed assets for the selling Advisor. The reason being is because the selling Advisor can immediately sell the future value of the Trailer Fees for cash to another Advisor. This sale can also take place with absolutely no consideration for terms and conditions that are included the selling Advisor's Investment Proposal and IPS, that is used convince the investor to make the recommended investments in the first place.

We have learned that there is no regulatory restriction forbidding one Investment Advisor selling a clients accounts to another Advisor, which accounts include mutual funds with Trailer Fees (Commissions), If the information we received that there is no restriction for one Investment Advisor selling a client's accounts to another Investment Advisor, without any discussion with the client is incorrect, we would appreciate so being advised.

Alex Urosevic for National PostOver the past year there has been a spike in the number of senior law firm partners who are looking to switch firms, says Warren Bongard, president and co-founder of ZSA Legal Recruitment Twitter Google+ LinkedIn Email Comments MoreThe recent exodus of 13 corporate mining and securities lawyers from Fraser Milner Casgrain LLP to Bennett Jones LLP was the most visible example of the fallout from FMC’s mega-merger with Dentons, but it also reflects a more low-profile but growing story. Lawyers, and increasingly senior partners, are switching firms. At least that’s what Warren Bongard, president and cofounder of recruitment firm ZSA Legal Recruitment is seeing.

The reality is that there has always been a steady flow of partners moving from firm to firm. The economic crisis of 2008 has increased that flow, and over the past year there has been a spike, with partners looking to move to higher performing firms, Mr. Bongard says.

At the same time, firms have become more transparent about where they want to focus their core practice areas. When that happens, it sometimes puts peripheral practice areas on the fringe, leaving certain people behind or less cared for, he says. “People think, ‘I don’t want to be a pension lawyer at a mining firm. I’d rather be with a firm that is more committed to my practice area.’”

They’d also rather be at a firm that’s thriving and where they have control over their practice. “Flat out, those are the two reasons senior partners with books of business upwards of $4-million move,” says Adam Lepofsky, president and founder of legal recruitment firm RainMaker Group. “Money and control over practice. That’s it.”

With the economy being so unpredictable, and the legal profession mirroring that uncertainty, moving becomes a little trickier, he says. “People’s practice areas are going up and down in terms of revenue. It’s similar to what free agent athletes face. Do you have leverage or not? A senior partner moving to a new firm is like a mini-merger. You have to consider all the variables: the other partners, the nature of the practice and its portability, the firm’s philosophy. It’s just like courting a merger with the same due diligence on both sides.”

That courting can take place in a couple of ways. The more conventional route starts with a partner talking to a friend at another firm over lunch, revealing he or she is unhappy and the friend in effect opening the door. “That’s what we call a direct recruit,” Mr. Bongard says. The other way is through a recruiter. “The latter has become a lot more commonplace, for a few reasons: as an agency we can provide multiple options. As well, we have a good sense of the marketplace, so we are able to share what firms are up to, which have growth on their minds, which have contraction on their minds, where there might be synergies — that’s the most important piece. If a lawyer comes to see me and says, ‘I have this private equity practice and I want to move it,’ we talk about the issues with their own firm so we can address it and identify appropriate firms to consider.”

In all placements, the hiring firm pays the recruiter’s fees, which are based on a percentage of the new hire’s compensation.

The mechanics of making a move at the senior partner level typically begin with determining whether there is a mutual like and synergies between the partner and the firm. “The premise here is if a partner is moving firms, he or she is likely to bring a portable book of business and so if that’s the case, you have to make sure there is a culture fit in terms of the personality of the partner and synergies with the practice area and the new firm,” Mr. Bongard says.

The next stage is to look at business conflicts. You don’t want a situation where a new lawyer represents Coke while the firm represents Pepsi. If everything seems to be aligned, then the idea has to be socialized. “If someone is coming in with a large book of business, how will others at the firm feel? Is it going to cannibalize the department? I’ve seen it before where a law firm wants to bring in an individual with a large book of business, and the individuals in that practice group feel threatened. You have to overcome that. And you do that by socializing the idea with the right department,” Mr. Bongard says.

Then it comes down to dollars and cents and the financial model that reflects a meeting of the minds. This is often the most challenging aspect of a move as every law firm compensates partners differently. The big issue at this stage is whether to admit a new senior partner as an equity partner or as a non-equity partner, Mr. Bongard says. “50% of the time, people join as full equity partners and the other half they join as counsel or non-equity partner with the view that within two years of joining they will become equity partners. In effect, it’s dating to make sure the fit is right. Fit is key because if two years in you realize this person isn’t really what you thought they were, it’s much harder to get rid of them as an equity partner.”

That said, every law firm has a partnership agreement that addresses the exit issue but there is no one fast rule as to how it works. Typically the senior partner invests $250,000 (some agreements require more, others less) that is paid back to the partner when he or she leaves. The repayment is usually spread out over a period of three to five years in order to give the firm a little more control over the process.

No rule prevents senior partners from taking clients because you can’t control a client’s choice — and in fact, senior partners are recruited because the expectation is that their clients will follow. What you can control is how you do it. “You can’t say, ‘I’m moving. Here is a transfer notice.’ Rather, the new firm will send a note to clients saying, ‘We’ve just hired X, we understand you’ve worked together,’ and invite them to move with the partner,” Mr. Bongard says. “The language is very specific.”

Client ownership is perhaps the grayest of gray areas when it comes to a senior partner move, Mr. Lepofsky says. “Who owns the book? Is it yours? The firm’s? Both? How do you split it up? For that reason, no prudent and honest senior partner will make any guarantee when it comes to revenues. They can certainly reveal what they’ve done in recent years and over their tenure and what they’ve done to produce those numbers. It’s up to the new shop to evaluate the partner’s potential based on reputation, expertise and prior years’ numbers to make that business decision.”

[1] The Defendants bring a motion for summary judgment seeking to dismiss the within action on the grounds that there is no genuine issue requiring a trial. Specifically, the Defendants contend that in the action the Plaintiff advances a claim for compensation for property to which the Plaintiff has no legal entitlement.

[2] Allen Eisen was an investment advisor employed by Union Securities Ltd. (“Union”) at the time of his death on January 4, 2010. He had worked at Union since April 8, 2009, when he moved from his prior place of employment at Research Capital Corporation.

[3] Eisen’s terms of employment at Union were contained in an employment offer letter dated April 8, 2009. That letter was accepted by Eisen, forming a contract of employment with Union. The Union letter provided for a “transition payment” at the outset of his employment, transition fees for clients being brought over from Research Capital Corporation, commission splits, provision of an assistant, coverage of marketing expenses, and other matters. Most importantly, the employment letter from Union stated that, “[a]ll accounts opened by you will be owned by you and may be sold within the company at the time of your choosing, subject to correct policies and procedures.”

[4] The April 8, 2009 employment letter was then supplemented by a letter dated May 26, 2009 setting out further terms of Eisen’s employment with Union. Among other things, the May 26th letter provided that Eisen would earn commissions in respect of his sales of securities while at Union. Allen also obtained an agreement from Union that he could employ his son, Lorn Eisen, as his assistant. Lorn was an aspiring investment advisor who had yet to pass the requisite examinations for his formal entrance to this licensed profession.

[5] Upon Eisen’s death, Union had a regulatory obligation to ensure proper supervision of Eisen’s client accounts. It assigned this task to the Defendant Aaron Hock, who is a licensed investment advisor, as required by the relevant regulations. Hock also took on Lorn Eisen as his assistant for these accounts. Union confirmed that if Lorn became qualified as an investment adviser, the Eisen accounts would be transferred to him for supervision.

[6] Lorn never became licensed as an investment advisor and after a number of months left his employment at Union. Hock has also now left Union, taking one of the Eisen clients with him to his new brokerage firm. The balance of the Eisen portfolio remained with Union. The Defendants contend that Hock made very little by way of commissions on the Eisen accounts, and that the salary that Lorn received for the months that he continued working at Union far outpaced the income generated by the Eisen accounts. As Union itself has now been sold to new owners, it is unclear what has become of the Eisen accounts.

[7] The Plaintiff has asked the Defendants whether, on the sale of the business, the owners of Union received compensation for the Eisen book of business, or if the sale price for Union put a specific value on the Eisen accounts. That inquiry has not been answered. Accordingly, the Plaintiff argues that while the Defendants baldly assert that the Eisen book of business had little value, Union has refused to disclose any information that would allow them to assess or verify that value.

[8] The Defendants respond by submitting that the Plaintiff’s request for information is out of sequence. First, the Defendants contend, the Plaintiff must establish that it has a legal right to the Eisen accounts following Allen Eisen’s death, and only if that can be established does the question of disclosure regarding those accounts come into play.

[9] In support of its argument that the Plaintiff retains no interest in the Eisen book of business, the Defendants point to a document produced by the Plaintiff which appears to be a generic employee policy document of Union’s and which sets out some general policy matters for Union employees. This document was produced by the Plaintiff after cross-examinations had been complete – apparently, Allen Eisen’s widow found it quite recently among Eisen’s belongings. Given its late disclosure, the Defendants at first objected to the admissibility of this Union policy document. Upon closer inspection, however, the Defendants realized that it could be helpful to their case and they now rely on this policy document to make their point about ownership of the accounts.

[10] In my view, the Union policy document is admissible despite the fact that it surfaced unusually late in the sequence of the motion. It is a Union document produced in the litigation by the Plaintiff, so neither party should be surprised by its existence or its contents. Any concern that it surfaced after cross-examinations were complete goes to the weight to be attributed to this document, but does not counter its admissibility on this motion.

[11] Among other things, the Union policy document states that upon death of an investment advisor, all accounts worked by that advisor belong to Union. Counsel for the Defendants argues that this indicates that after Eisen’s death Union is the sole owner of the Eisen accounts and does not owe the Eisen estate any reporting or disclosure regarding the profitability of those accounts. It is the Defendant’s position that Eisen had the right during his lifetime to sell his book of business to another adviser within Union, but once he died his estate lost that property right.

[12] Counsel for the Defendants submits that unfair as this may seem for the estate of an investment advisor, it is the consequence of the regulatory policy requiring a licensed securities dealer to deal with the accounts. Union says that although it was obliged to appoint an investment advisor to oversee the Eisen accounts, it was not obliged to purchase the accounts or to compensate the estate for the value of the accounts as they were already owned by Union.

[13] For his part, counsel for the Plaintiff points out that [color]ordinarily an asset owned by an individual is, by operation of law, owned by his estate upon his death[/color]. Counsel for the Plaintiff submits that while a licensed advisor may be required to supervise trades in the accounts of a deceased advisor, ownership should, in the absence of any agreement to the contrary, pass directly to the estate.

[14] Counsel for the Plaintiff also points out that while the Union policy document states that an investment advisor’s accounts are owned by Union after the advisor’s death, it also states that an investment advisor’s accounts are owned by Union while the advisor is still alive and working at the firm. We know from Eisen’s employment letter, however, that this was not the case with Eisen; his terms of employment specifically provided that he personally owned his accounts. Counsel for the Plaintiff submits that if ownership rights during Eisen’s lifetime differed from Union’s general policy for its employees, it stands to reason that ownership rights after Eisen’s death also differ from what is described in Union’s general policy document.

[15] It is not clear whether the general Union policy document applied to Eisen or not. The document has been produced late in the day, without any affidavit evidence or testimony explaining how it came into the hands of the Eisen estate. Moreover, there has been no evidence from anyone at Union explaining the genesis of this policy document and whether it was distributed to all employees or given to Eisen in particular. Furthermore, there is no evidence in the record as to whether Eisen’s arrangement was special, or as to how many Union investment advisors had particular employment contracts that, like Eisen’s, differed from the general policy on ownership of accounts.

[16] Since there is no evidence in the record about the status of the Union policy document and how it fits with Eisen’s employment letter, it is impossible at this stage to know what to make of the account ownership question. Specifically, without more evidence of the employment situation throughout Union it cannot be determined what the difference between the general policy and the Eisen contract regarding ownership during the advisor’s lifetime might mean for the question of ownership after his death.

[17] In short, the question of ownership of Eisen’s book of business after his death cannot be determined at this stage. As a matter of legal logic, neither side has an argument that trumps the other. The Defendant is right that an estate is not licensed and by regulation cannot deal with the investment accounts, and, consequently, it makes no sense for trading accounts to belong to the estate of a deceased advisor. On the other hand, the Plaintiff is right that ownership can be considered separate from trading authority, and, consequently, it makes no sense for accounts that belonged to an investment advisor the minute before his death to cease being property of his estate once he has died.

[18] Since legal logic alone cannot answer the question of ownership, more evidence is needed as to whether or not the general Union policy regarding ownership applied to Eisen. The policy document that has been produced points both ways in that it answers the question generally at the same time as it suggests that the general answer might not apply here. More evidence on point is clearly needed before the question of ownership can be determined.

[1] Accordingly, I do not have a full appreciation of the evidence required to make dispositive findings. Combined Air Mechanical Services v. Flesch (2011), 108 OR (3d) 1, at paras 73-75 (Ont CA). Under Rule 20, the onus is on the moving party to show that there is no genuine issue requiring a trial. Pizza Pizza Ltd. v. Gillespie 1990 CanLII 4023 (ON SC), (1990), 75 OR (2d) 225 (Ont Gen Div). In the present circumstances, this onus has not been met by the Defendants.

[19] Complete discoveries and a trial are needed here in order to determine the threshold issue of ownership of the Eisen accounts and, if relevant after that determination, the value of those accounts. The Defendants’ motion for summary judgment is therefore dismissed.

[20] The Plaintiff has provided a Costs Outline requesting costs on a partial indemnity basis in the amount of $12,198.92, plus disbursements and HST in the amount of $2,671.57. In my view, that is a very reasonable request. The Defendants shall pay costs to the Plaintiff in the total amount of $14,870.49, inclusive of disbursements and HST.

Even an iron-clad agreement may not serve an employer’s best interests when a former employee chooses to ignore his contract and pilfers your clients.

Christopher Redcliffe was an advisor for Redcliffe Investments, an insurance brokerage owned by his father, when it was purchased by Hub International. Hub offered Redcliffe continuing employment, with a restrictive covenant added to his employment agreement preventing him from approaching Hub clients for one year and former clients of Redcliffe Investments for two years after he left.

Redcliffe accepted the employment offer, but things did not work out and he resigned a little more than a year later. He soon began courting Hub’s clients despite the non-solicitation clause he signed with Hub.

Hub immediately sought a court order to force Redcliffe to cease solicitation of its clients. Mr. Justice Paul Meyers of the Supreme Court of British Columbia concluded that Redcliffe had breached the restrictive convenants in his agreement. Nonetheless, the Court denied Hub’s request for an injunction and allowed Redcliffe to continue to solicit Hub’s clients.

Because Hub could accurately calculate its financial loss, the court held that the company should have asked for damages instead of injunctive relief. A court order forcing a former employee to stop soliciting clients is appropriate only if a company cannot calculate its loss.

Restrictive covenants are fraught with difficulty. Redcliffe’s flouting of the clause in his agreement shows even an iron-clad agreement, in the end, may not be enough. An employee can still pose problems for his or her employer long after departure.

A properly constructed restrictive covenant is the first step in protecting your business interests from former employees. When such contracts are to be included in an employment agreement, ask yourself the following questions:

What are you trying to protect? An employer can only use a restrictive covenant to protect legitimate interests: trade secrets, confidential information or current and prospective clients. Courts are reluctant to protect anything more.

Non-competition or non-solicitation? The former offers more protection against former employees and can restrict them, for example, from setting up a competing business in the same city for a period of time. However, they are rarely enforced if a non-solicitation clause is enough to largely protect your business interests. It is also rarely enforced against anyone but the most senior executives.

Reasonable restrictions If your restrictions are too severe they will not hold up in court. Consider the scope of your business interests. If you operate in only one city, a nationwide restriction will not be enforceable. Time restrictions that are longer than a couple of years will be hard to support as well. Restrictions that effectively preclude the employee from working in their industry will not be enforceable.

Clarity is king The employee must readily understand precisely what they are precluded from doing. If the restrictions are not clear, the clause will be unenforceable.

Be consistent Employees in similar positions should not be given different degrees of restriction. Courts will treat the most lenient clause as being the most reasonable in such cases. Concomitantly, employees who present different risks should have different restrictions.

Calculable harm Determine if you would be able to calculate your financial loss if your former employee decides to rebel. If you can calculate the loss you will only be able to ask for damages.

Howard Levitt is senior partner of Levitt LLP, (levittllp.ca) employment and labour lawyers. He practises employment law in eight provinces and is author of The Law of Hiring in Canada.

this rule may be of interest to brokers who depart from their firm to work elsewhere. I have seen at least on investment firm, in its zest to hamper the departing broker from doing business (and help their own retention of clients) cook up or otherwise "encourage" customer complaints that would ordinarily not see the light of day........all of a sudden, even the most spurious of customer complaint is given top priority by the firm, in an effort to use the complaint against the departing broker, while everyone conveniently forgets that the firm fanning the flames of the complaint, is also the firm ultimately responsible for supervision............somehow in this "self regulated" world where the rules are all interpreted and enforced by those who the rules apply to.........firms will forget this supervision responsibility and pin 100% fault on the departing broker. That is the way it is done. Broker beware